Chinese onshore and offshore corporate bond defaults will continue to rise over the next 12 months due to the country's slower economic growth, companies' weak liquidity profiles and investors' heightened risk aversion, said Moody's Investors Service recently.
Though the government's liquidity measures helped some companies avoid default by enabling short-term refinancing, they didn’t significantly support long-dated onshore bond issuance," said Ivan Chung, a Moody's Associate Managing Director.
“This reliance on short-term funding paves the way for recurring refinancing needs, raising the default risk for financially weak companies,” Chung noted.
In particular, financially weak private enterprises will be more likely to default than state-owned enterprises, as they typically rely on short-term funding, pursue aggressive debt-funded growth and have weaker corporate governance structures and less resources to withstand financial stress than state-owned and investment-grade companies, he added.
While defaults will rise across multiple sectors given the broad impact of China's slower economic growth, the onshore corporate bond default rate should remain lower than that for the corporate bond issuers Moody's rates globally, the credit rating agency said.
This is because the onshore bond market is dominated by state-owned companies which are likely to receive government support, Moody’s pointed out.
Post-default, recovery paths and levels will both vary, according to Moody’s.
Market-oriented approaches to debt restructuring are gradually developing in China, but bond investors still have limited bargaining power and options in debt restructuring, the company said.
Meanwhile, for companies that default on both onshore and offshore bonds, offshore bonds tend to have greater transparency and faster recovery, the firm added.
Moody's forecasts China's GDP will grow 1.9% in 2020, followed by 7% growth in 2021.